The Contagion Effect of Fair Value Accounting: Some Evidence from Indian Banking Industry

M Subramanyam

The IUP Journal of Bank Management, 2012, vol. XI, issue 2, 71-80

Abstract: Increasing evidence has been reported by researchers regarding the amplifying negative quality of fair value-oriented accounting regime. Critics have blamed the fair value accounting for amplifying the recent subprime crisis and causing a financial meltdown in the US. This paper investigates the contagion (negative) effect of introducing fair value accounting for commercial banks in India and its relationship with changes in the banks’ Non-Performing Assets (NPA) ratio. It is found that there is evidence to suggest significant increase in the NPA ratios of the banks due to the introduction of fair value-oriented accounting of the banks’ assets. The analysis suggests that increased bank contagion associated with fair value accounting is more likely to spread to banks that are inherently weak (in respect of capital adequacy and other parameters).

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjbm:v:11:y:2012:i:2:p:71-80

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